Blockchain & Crypto Currencies — What You Must Know

Hi guys, Hope you enjoyed our earlier discussions on how money is created, who controls it, and the route taken by it to the stock market. Few observations which could not be ignored during this discussion were……no matter what, in the longer run….the stock market will keep rising up, despite the downturn in the economy. This would be more pronounced during crisis times such as the current Coronavirus pandemic. We also saw the reason and connection between economic relief packages provided by governments and central banks and how it fuels the growth of indices further. This concept itself is scary. The unprecedented rise of indices of stock exchanges the world over has yet again proven that it is not connected to the real world and in no way reflects the real economic situation in that country. This also hinted at its vulnerability of being manipulated by few powerful financial institutions right under the noses of governing bodies such as SEBI. This has caused many investors to look for alternatives that are beyond the control of any governmental body as they fear someday this entire bubble will crash. Since modern money does not have any physical assets attached to it…..it does not have any intrinsic value and therefore it has to be accepted for its face value. If central banks or governments bungle up, it can just wipe off your entire wealth in one stroke. Therefore many people have turned their attention to investing in traditional means such as gold/ silver or real estate, while many new-age tech-savvy investors are exploring digital money or Crypto Currencies.

Many of our young readers and investors have been asking me for advice to invest in Crypto Currencies. Before even I start the discussions on this subject, let me sum up by saying that, for me, any means of wealth creation is welcome as long as it is legal, clean and its risk to reward ratio is favorable but personally so far, I have stayed away from it….why???? let's find out…….

The first of the crypto-currency Bitcoin was created in January 2009 by a mysterious person whose pseudo name was Satoshi Nakamoto in a response to the financial collapse of 2008. Unsurprisingly, Satoshi Nakamoto, the creator of Bitcoin, is at the top of the list of Bitcoin holders and is estimated to own about 1 million bitcoins which translates to about $34.9 billion in 2021…….cool …isn't it??

In concept, Bitcoin was created as a way for people to send money over the internet without any interference from central agencies such as banks or governments. This new digital currency was to function identical to any other currency but was to operate free of central control and hence was to be free from manipulations by governments. To achieve this, it was created as a decentralized digital currency which is to follow rules set out in a whitepaper published by Satoshi Nakamoto in 2009 along with the creation of Bitcoins. Like money, this too does not have any intrinsic value, and its worth is determined by demand and supply. As more and more people are getting interested in it, its demand, as well as price, is rising. I am sure, like me, you too must be thinking, then why can’t I just create it more??? Now the things get interesting. It cannot be simply cloned or created on just one computer. Since it is decentralized in nature, the majority of the nodes on which Bitcoin ledgers are stored would need to recognize every entry either for mining (….creation of Bitcoin) or receipt of it from someone else or for that matter even transaction done for payment of goods and service. You see…..it is not possible to create any fake Bitcoin or fudge its entry into the digital records. The technology on which Bitcoin is based was invented along with it and is known as BlockChain.

In the BlockChain model, when someone requests any transaction it is immediately broadcasted to the entire peer-to-peer (P2P) network consisting of computers known as nodes. This network of nodes will verify the transaction based on set algorithms. Once the transaction is verified, it is collated along with other data to create a new block of data for the ledger. This new block is now added to the existing BlockChain in a manner that is permanent and cannot be changed. At the moment this looks like a one-stop-shop for all the dealings where there are trust issues, fear of manipulation, or simply the fear of records getting destroyed or damaged. This surely looks amazing and no wonder it has so many applications in business, legal, documentation, and financial dealings. OK….the technology looks good and the model of Bitcoin sound…….should I invest in it?????? Before that let’s find out, how much a Bitcoin is worth??

As covered earlier, it does not have any intrinsic value….more so, it is virtual in nature. Therefore its value is determined by the famed Demand and Supply rule. Fortunately for it, its supply has been curtailed at the creation by the very set of rules which defined the first Bitcoin, and therefore, supply is going to be lesser than the demand forever. But, how far can this keep on climbing will depend on its acceptability amongst global financial regulatory bodies, who change their stance every second day? When it started trading in 2010, its value was lesser than a fraction of a penny but then inexplicably in July 2010, it rose to around $0.08 which was a more than 300% rise. By next year April, it was trading at $1 which jumped to $32 by July before falling again to $2 in November 2011. Similar patterns have continued to emerge over its trading history of about a decade. Some estimate its worth to be around $ 5 lakhs by 2030 many others discount the entire thing as a worthless bubble similar to Holland tulip farming or the Californian gold rush. In most countries including India, you cannot buy your groceries or milk using Bitcoin. Many countries outright support it such as Singapore, many are cautiously treading the path such as European countries and the US, and some outrightly oppose it such as China. Therefore, till such time that it is brought under some legal framework, investing in Bitcoin or any other Crypto will remain speculative with extremely high rewards if you are on the winning side of the bet or unmeasured pain if you happen to be on the wrong side of price bet and this has been my reason of keeping out it. For those who still want to invest in it, my advice would be to limit your exposure, have patience and buy it low (don’t worry prices will come to attractive zone) as per inflection point theory (support — resistance) but at no time get emotionally attached to it as it may be the next supernova of tomorrow or may just fade away like a comet, unfortunately, the answers are all in the future and certainly are not visible at the moment.

That’s all folks……it was a controversial topic. All those who are believers do not want to hear anything against Cryptos and for all nonbelievers, it was just an experiment to prove concepts of Block Chains which has lasted for too long. Whatever it may be, I would like to caution all to be careful with their money especially when dealing in a virtual world with a limited legal framework. In the next blog post, I will try to cover what should an Indian investor do to secure its investment in Cryptos and what may be the future of other Crypto start-ups surely later or sooner they will compete for space.

Guys, like always, it was very satisfying to learn about a new concept of wealth creation. What do you think about it……please leave your comments and suggestions too. Please do not forget to like and share the post and hit the FOLLOW button before you leave. See you again next week.

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Blockchain & Crypto Currencies — What You Must Know

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Dhruv Srivastava